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Was the Box Office Performance of "The Interview" a Win for Netflix?

Netflix is now streaming "The Interview." What does it say about the company's future?

For those who haven't seen the controversial Sony(NYSE:SNE) Pictures Entertainment film The Interview, it's now streaming on Netflix(NASDAQ:NFLX), which acquired the rights to stream the flick just 30 days after its theatrical release.

Threats surrounding the release of the film caused Sony to change course and release the film digitally along with a limited theatrical release. The big theater chains AMC Entertainment(NYSE:AMC) and Regal Entertainment(NYSE:RGC) canceled their screenings after threats of terrorist attacks were made. Even after those threats didn't pan out, the large chains refused to show the movie due to the simultaneous digital release.

When Sony announced the digital release of The Interview in late December, I wrote that Netflix would be paying close attention to the film's performance, not digitally, but in theaters. About 15 months ago, Netflix Chief Content Officer Ted Sarandos suggested releasing movies the same day with theaters. The Interview provided a good test case to see if it's a viable strategy for major movie studios like Sony.

Box office sales almost completely disappearedExpectations going into the opening weekend for The Interview weren't especially high considering the limited release among 331 independent theaters. While it was expected to gross about $20 million to $25 million at the box office opening weekend with a wide release, that number was adjusted to $3 million to $4 million after the large chains canceled. As it turned out, during its four-day weekend release, The Interview grossed just $2.9 million at the box office.

That wasn't a great start for the film, and when the number of theaters increased by 250 in its second weekend, the box office sales didn't get any better. Sales just topped $1 million during the first weekend (Friday through Sunday) of the year, which was the movie's second weekend in theaters.

Overall, box office sales totaled just $6.1 million in the first month of its release.

Digital sales went gangbustersWhile some people went out to see the film in theaters, many more stayed home and rented or bought the movie online or through their pay-TV provider. In its opening weekend, the digital release grossed $15 million in revenue. After the second weekend, that number climbed to $31 million.

By the time Netflix announced it would start streaming The Interview on Jan. 24, the movie had passed $40 million in digital sales. That's about 6.5 times the box office gross in that same period.

Indeed, digital sales were much more lucrative than the box office, but that doesn't mean more studios are going to start looking to release movies digitally at the same time as in theaters.

Movie-nomicsSince the digital release outperformed the theatrical release so soundly, it doesn't make sense for Sony or any other movie studio to attempt simultaneous digital and theatrical releases as they don't want to lose the movie theaters' support.

Regal and AMC provide valuable marketing for movie studios in the forms of pre-roll trailers, posters, and other promotional material. Without an exclusive window, these two theater giants would likely refuse to promote and screen a movie.

Theaters generally offer higher revenue potential than an on-demand release. While on-demand might reach a wider audience, it comes at a price. For $6, for example, the only limit to the number of people who can view the film is the size of your living room. At the theater, every viewer needs a ticket. What's more, the average ticket price is nearly twice as much as the average on-demand rental price.

That's too bad for Netflix, as it likely won't see an incident like The Interview ever again. However, it can continue to release its own productions, such as its planned sequel to Crouching Tiger Hidden Dragon. That movie will be released simultaneously on Netflix and in IMAX theaters (but not those 400-plus screens owned by AMC or Regal).

Crouching Tiger Hidden Dragon: The Green Legend will be available on about as many screens globally as The Interview was in the U.S. Considering it won't have the same buzz around it as The Interview, it probably won't perform nearly as well. And remember, box-office revenue is typically split with the production company, so the number starts to look really small compared to Netflix's $5.5 billion in revenue last year.

After the box office performance of The Interview, Netflix investors may be wondering why the company is even bothering to work with theaters at all. As Netflix's content costs continue to rise, its free cash flow has been unable to keep up. In 2014, Netflix generated free cash flow of negative $128 million. Thus, Netflix may be looking for ways to generate revenue outside of subscription fees, but it doesn't look like releasing its movies in theaters will provide much relief.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy